As our 31 December year-end clients finalise their financial statements, it’s a timely reminder to not make immaterial changes. It is important for entities to find the right balance between the accuracy of financial information and delivering financial statements in a timely manner. It’s here that the concept of materiality becomes increasingly important. Materiality helps management decide how to treat misstatements identified during the audit.
Materiality is our guideline for providing reasonable assurance that entities’ financial statements are fairly stated. When planning an audit, we set quantitative materiality as a dollar amount based on a benchmark relevant to users of the financial statements. This helps us ensure we have reasonable assurance that the financial report is fair and correct. We will communicate our materiality thresholds to you in our external audit plan, and continue to re-assess and communicate materiality during our audit.
Qualitative materiality is more subjective and often refers to the fair presentation of financial information.
Our auditing standards require us to record all misstatements, other than those that are clearly trivial. Misstatements are considered clearly trivial when they are of such a low value or significance that they are unlikely to have an impact on the financial statements collectively. For further insights into how we record material misstatements, see our blog post How we record material misstatements.
Any misstatements above those considered clearly trivial are recorded to allow us to assess whether the misstatements are collectively material to the financial report.
Misstatement means a difference between the reported amount, classification, presentation, or disclosure of a financial report item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework. Misstatements can arise from error or fraud.
Considering uncorrected misstatements
We communicate a summary of uncorrected misstatements to you with the results of our audit in our closing report. When considering any uncorrected misstatements we have reported, you should ensure you understand the reported misstatement and how the difference arose. There may be weaknesses in your internal controls that need improvement. Management will acknowledge to us in writing that these uncorrected misstatements are collectively immaterial.
Your materiality thresholds may be lower than ours; however, in determining any further action you will take, you should also be mindful that we consider these items to be collectively immaterial to the financial statements.
Would an adjustment influence a user of your financial statements?
We continue to encourage entities not to amend their financial statements for immaterial adjustments, as they may impact overall timeliness and cost of the financial statement process and increase the risk of preparation errors.
Setting an appropriate materiality threshold for adjustments of misstatements for year-end financial statements will prevent your finance team from spending additional effort making adjustments that would not influence a user of your financial statements.
When considering an adjustment, ask:
- Is it quantitatively or qualitatively material?
- Is it needed by the readers?
- Are there laws, regulations or prescribed requirements that require your entity to change the disclosure?
If the response is no, you are not required to make an adjustment.
Please remember that having uncorrected misstatements that both management and the auditor collectively assess as being immaterial is not a bad thing. It means that no reader will be misled by the financial statements as they are currently presented, and additional time and public money does not need to be spent to make the financial statements more precise.
We will continue to work with your finance teams to discuss all misstatements we identify and will only ask you to make changes to financial statements where the impact is material.
For more information, please see our fact sheet on Assessing financial statement preparation for state government entities.